IRA or Solo 401(k)? Which Self-Directed retirement account should I pick?

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The Self-Directed 401(k) may have great advantages for those with self-employed income. The Self-Directed IRA is the easiest to qualify for and report to the IRS.


What are the main differences between the IRA and Solo 401(k)?

  • Contribution limits. The Solo 401k has higher contribution limits than the Self-directed IRA.
  • IRAs are for individuals. Solo 401(k)s are tied to those who are self-employed
  • Solo 401(k)s do not need a custodian. They are tied to a trust and the employer entity.
  • How Roth works: Solo 401(k)s can have a Pre-Tax/Traditional Bucket and Post-Tax/ Roth bucket for different types of tax savings. However, they cannot accept Roth Rollovers. If you open an IRA, you need to pick a preferred account or open two accounts. Traditional IRAs should only take pre-tax dollars and Roth should only take after-tax dollars unless you are ready for conversion and/or a taxable event.
  • Solo 401(k)s have ERISA asset protections

When should I go for the Solo 401(k)?

  • First, do you qualify for the Solo 401(k)?
  • You want to take borrow against your retirement account with a loan
  • You want very high contribution limits
  • You have a steady self-employment income... but you don't have full-time employees other than your spouse
  • You want the option to contribute Pre-Tax and Post-Tax Roth, depending on the year.
  • You are confident working by yourself or with your CPA and your own business to calculate contributions for yourself, your spouse, and your employer contribution or profit-sharing
  • You are investing in real estate, intend to borrow against that real estate, which can generate UDFI and UBIT.  Consult a tax advisor that understands UBIT before deciding just on this factor. Rocket Dollar can suggest one if you need extra help. 

When should I stick with an IRA?

  • If you do not have any self-employment income
  • If you want to contribute to an account continuously, but your plan on hiring employees or your self-employed income will dry up soon. (You can keep an old Self-Directed Solo 401(k) open, but you can't contribute to it without new self-employment income.)
  • You want the utmost simplicity when it comes to reporting. You must manage contributions and might have to calculate profit sharing in a Solo 401(k). The Rocket Dollar Support team can assist you in making contributions and working with your account, but we are not tax advisors or CPAs. An IRA is much easier to plan out and contribute to each year.
  • You don't need higher contribution limits
  • If you have old Roth accounts you want to roll over and consolidate. Unfortunately, the IRS does NOT let you roll over Roth accounts into a Solo 401(k) Designated Roth accounts. Here is the IRS rollover chart.

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